Four months into the year, the U.S. dollar has yet to find steady ground to mount much of a rally. In March, the greenback made gains against most of its peers in reaction to comments by the Federal Reserve Chair Janet Yellen during the press conference that followed the FOMC meeting. The dollar strengthened as market participants believed that an increase to the fed funds rate would come sooner than most had expected. In April, however, whatever gains the dollar made was given back as the Fed chair used her second public speaking engagement to reiterate that monetary policy would remain accommodative as long as inflation is benign and the economy continues to slacken.

Excluding the Canadian dollar, which is down about 3.6 percent year-to-date, the U.S. dollar has underperformed all other G10 currencies despite an economy that continues to report improving numbers for unemployment and GDP growth. Of the majors, the best performers have been the Australian and New Zealand dollars. Both have gained about 3.7 percent in 2014. Even the Japanese yen has rebounded about 2.75 percent this year, after getting crushed 20 percent last year due to its considerable implementation of QE. As for the euro, it quickly rebounded towards its 52-week high and the pound was threatening to cross over its five-year high against the dollar. Given recent strong data on jobs and industrial production, the pound has been resilient with broad support from traders who foresee that a rate hike is in store in early 2015. Both currencies have also benefited from the volatility driven by the political unrest in Ukraine, as investors look for multiple safe havens outside of the U.S. dollar.

The dollar's weakness throughout April is a reminder that the Federal Reserve has remained dovish with any plans to tighten monetary policy, even as it continues to taper down the asset purchase program. At the FOMC's announced pace, the tapering efforts should be concluded by the end of the year. The current balance sheet, however, remains very large at $4.3 trillion. It will take considerable time to pare this amount down to more historical levels, which means that any hike in interest rates may not come so quickly. The prevailing market expectation is that a rate increase would not occur until mid-2015, at the earliest. Even the most bullish forecast by the Fed itself does not predict the central benchmark rate to be above 2 percent until late 2016. Given that perspective, it is likely that the dollar may continue to underperform against many of its peers as long as rates stay zero bound and U.S. bond yields remain subdued.

Key Currencies

RUB – Russia’s ruble started off very strongly at the start of the month before losing it all at end of April, to close 1.9 percent down. Food inflation was the maximum contributor to Russia's rising inflation, which rose to 6.9 percent in March. If political tensions continue, we can expect a further hike in inflation in the coming months. Given recent sanctions against Russia and continued political friction with the Ukraine, the ruble will remain under pressure. The Central Bank of Russia will have to consider all these factors in future decisions on the direction of interest rates.

INR – India’s rupee has traded in a close range the past month, around the 60 level. Hopes for a stable government are high once the national election results is announced on 16th May, as this will boost sentiment and bring in much needed stability. The CPI remains a concern, rising again this month to 8.3 percent, due mostly to increased food prices. Inflation will be closely watched in the coming months in anticipation to higher El Nino risks affecting the upcoming monsoons.

CNY – China’s yuan was flat for the first two weeks before losing some steam at the end of the month, closing the month with a 0.6 percent loss. While most Asian currencies have seen appreciation since the beginning of this year, the Chinese yuan has been one of the worst performers. First quarter GDP was slightly better than expected, coming in at 7.4 percent, but was still lower than the prior quarter's growth of 7.7 percent. Manufacturing PMI showed a modest rise, while retail sales and industrial production were subdued.

AUD – Australia’s dollar dropped to 0.9252 low and went on to make a new three-week low of 0.9227. China's crackdown on the financing in the iron ore market is affecting the price of the commodity, which forms a big part of Australia's export. Weaker than expected CPI at 0.6 percent QoQ, due to subdued domestic demand growth, puts additional pressure for a rate cut in 3Q14. Employment remained strong, with nearly +90K jobs added in the latest reading and the unemployment rate dropped 0.30 percent. Business confidence continued to fall again by -3 points to +4. Weak Chinese PMI data impacted the AUD as well.

CAD – Canada’s dollar has fallen nearly 3.6 percent this year on shrinking demand from the U.S., its biggest export market, despite other commodity linked peers doing better. Rising energy costs were reflected in the headline CPI inflation in March, which rose to 1.5 percent YoY. Core inflation increased to 1.3 percent from 1.2 percent. The Bank of Canada left rates unchanged, and reiterated that stronger inflation without an accompanying stronger growth won't impact their policy stance.

GBP – The British pound has consistently gained over the month rallying to a peak of 1.6833 from sub 1.6790 levels. Positive Q1 GDP data is expected to further boost the currency. Unemployment rate fell to 6.9 percent, below the 7 percent forward guidance provided by the Bank of England as a threshold to increasing rates. The decline was driven by real employment growth, rather than the common falling participation rate. Wage growth was weaker than expected, rising to 1.4 percent from 1.2 percent.

JPY – Japan’s yen is trading in a broad sideways range within 100.00-105.00. The Bank of Japan held rates steady, with the BOJ Governor stressing that there was no need for monetary easing for the moment given the lack of data after the VAT hike. Japan's trade deficit posted the widest margin for March at 1.45 trillion yen. Consumer confidence fell in March to 37.5 from 38.5 in February, despite demand being at its peak in anticipation of the consumption tax hike.

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Currency Rates Economic Matrix Key Currencies Four months into the year, the U.S. dollar has yet to find steady ground to mount much of a rally. In March, the greenback made gains against most of its peers in reaction to comments by the Federal Reserve Chair Janet Yellen during the press conference that followed the FOMC meeting. The dollar strengthened as market participants believed that an increase to the fed funds rate would come sooner than most had expected. In April, however, whatever gains the dollar made was given back as the Fed chair used her second public speaking engagement to reiterate that monetary policy would remain accommodative as long as inflation is benign and the economy continues to slacken.

Excluding the Canadian dollar, which is down about 3.6 percent year-to-date, the U.S. dollar has underperformed all other G10 currencies despite an economy that continues to report improving numbers for unemployment and GDP growth. Of the majors,...Read More